Global Water Resources, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results; dollar amounts below are U.S. dollars. The company owns and operates water, wastewater, and recycled-water utilities, principally in metropolitan Phoenix, Arizona.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $8.472M | $8.180M | $23.408M | $22.585M |
| Operating income | $2.810M | $2.887M | $5.623M | $4.874M |
| Net income (loss) | $1.203M | $1.285M | $1.817M | $(2.560)M |
| Diluted EPS | $0.06 | $0.07 | $0.09 | $(0.13) |
| Operating cash flow | Not presented separately | Not presented separately | $8.280M | $2.168M |
| Capital expenditures | Not presented separately | Not presented separately | $16.602M | $4.513M |
- Q3 revenue rose 3.6%, while operating income fell 2.7% and net income fell 6.4%. Operating margin was approximately 33.2%, versus 35.3% a year earlier.
- Nine-month revenue increased 3.6%; operating income rose 15.4%. The company moved from a prior-year net loss to net income. Nine-month operating margin was approximately 24.0%, versus 21.6%.
- Q3 revenue growth reflected rate increases and 4.1% growth in active connections, partly offset by lower water consumption. Nine-month growth also reflected increased consumption at continuing utilities; the 2016 comparison included revenue from Willow Valley, sold in May 2016.
- Cash and cash equivalents were $7.838M at September 30, 2017, down from $20.498M at year-end 2016. Current assets were $12.720M and current liabilities $10.479M.
- Net cash used in investing was $16.814M for the nine months, principally reflecting elevated capital spending. Operating cash flow less capital expenditures was approximately negative $8.322M.
- Long-term debt was $114.355M net of issuance costs, with $8,000 current debt. Senior secured notes have a 4.55% blended rate and long maturities. The company reported compliance with financial covenants at quarter-end.
- Dividends declared were $0.07 per share for Q3 and $0.21 per share year to date. A dividend increase was announced November 9, 2017, to an annualized $0.2835 per share, subject to board discretion and restrictions.
Material changes and notable items
- Nine-month interest expense fell to $3.889M from $10.595M, primarily because the 2016 refinancing replaced tax-exempt bonds with senior secured notes. The prior-year period included a $3.2M prepayment penalty and $2.2M write-off of loan fees.
- Capital expenditures increased substantially as the company accelerated planned investments under an IRS-approved extension to reinvestment timing for the Valencia condemnation gain. Management expected most qualifying investments to be completed in 2017, with remaining work in early 2018, and anticipated lower spending in 2018 and later years.
- Active service connections increased 4.1% year over year to 38,536; total connections increased 3.8% to 39,179. Eagletail Water Company was acquired in May for approximately $80,000, adding about 55 active connections.
- FATHOM service fees declined following a contract-rate reduction effective January 2017. The company also recorded a $243,000 gain related to FATHOM’s financing and a $1.1M Valencia earnout in the nine-month period.
- The filing corrected an immaterial prior-period stock-compensation error; the correction increased previously reported 2016 net income by $139,000 for Q3 and $202,000 for the first nine months. Management said it did not affect cash flows.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management stated it believed cash on hand and expected operating cash flows would support operations, the capital plan, and covenant compliance for at least the next 12 months.
- Management cited Phoenix-area population and connection growth as opportunities, while noting that results are seasonal and sensitive to weather, customer usage, and precipitation.
- Key business risks include Arizona rate regulation and regulatory lag, infrastructure investment recovery, development cycles, water availability and quality, drought, environmental requirements, and volatile power and chemical costs. The company relies predominantly on groundwater and recycled water.
- Debt covenants require a minimum 1.10-to-1.00 debt-service coverage ratio; dividends may be restricted below a 1.25 ratio, subject to specified exceptions. Dividend declarations remain discretionary.
- Management reported no known legal proceeding expected to materially affect the company and no material change in previously disclosed risk factors. Contractual obligations included $115.070M of long-term debt and $69.823M of future interest; developer advances subject to refunds were not included because amounts and timing could not be estimated.
Important facts for investors to verify
- Whether planned 2017–early 2018 capital projects were completed as expected, and how the spending affects future cash flow, rate base, and tax liabilities.
- Cash levels, operating cash generation, and funding needs given capital expenditures that exceeded operating cash flow during the first nine months.
- Connection growth, water consumption, precipitation, and the effect of seasonal demand on revenue and margins.
- Debt-service coverage, dividend capacity, and continued covenant compliance.
- Progress on Valencia earnout receipts and the remaining Loop 303 proceeds; timing depends on third-party development milestones.